• Underlying operating profit of £1.1bn and underlying margin of 14.0% reflects the impact of our strategic initiatives, with commercial optimisation and cost efficiency benefits across the Group
• Free cash flow of £1.2bn driven by higher operating profit and continued LTSA balance growth
• Return on capital¹ increased to 13.8% and represents significant value creation
• Net debt reduced to £0.8bn driven by statutory net cash flow from operating activities of £1.7bn
• Full year guidance raised in a challenging supply chain environment: we now expect underlying operating profit between £2.1bn and £2.3bn and free cash flow between £2.1bn and £2.2bn
• Reinstating shareholder distributions in respect of the full year 2024 results starting at a 30% pay-out ratio of underlying profit after tax with an ongoing pay-out ratio of 30-40% each year²

Tufan Erginbilgic, CEO said: “Our transformation of Rolls-Royce into a high-performing, competitive, resilient, and growing business is proceeding with pace and intensity. We are expanding the earnings and cash potential of the business in a challenging supply chain environment, which we are proactively managing. We are on track to deliver our mid-term targets.

Our strong first half results reflect the continued delivery of our strategic initiatives and a relentless focus on commercial optimisation and cost efficiencies across the Group. These results and our increased financial resilience give us the confidence to raise our 2024 guidance and reinstate shareholder distributions in respect of the full year 2024 results.”

Half Year 2024 Group Results

¹ Adjusted return on capital is defined on page 46 and is abbreviated to return on capital
² Subject to final Board recommendation and shareholder approval at the 2025 Annual General Meeting. This applies to all references to the reinstatement of shareholder distributions in this document. A 30-40% payout ratio will be applied to ‘underlying profit after tax’ which is equal to ‘Underlying profit for the period’
³ All underlying income statement commentary is provided on an organic basis unless otherwise stated. A reconciliation of alternative performance measures to their statutory equivalent is provided on pages 43 to 46

Half year 2024 performance summary

• Significantly higher operating profit and margins in a challenging supply chain environment. Underlying operating profit rose by £0.5bn to £1.1bn, a 74% increase versus the prior period. This was driven by our transformation programme and strategic initiatives, with commercial optimisation and cost efficiency benefits across the Group. Underlying operating margin rose by 4.4pts to 14.0%. The largest improvement was in Civil Aerospace, which delivered an operating margin of 18.0% (H1 2023: 12.4%). This was driven by higher aftermarket profit from large engine LTSA (long term service agreements) and time and materials, stronger performance in business aviation in both original equipment (OE) and aftermarket and net contractual margin improvements. Defence delivered an underlying operating margin of 15.5% (H1 2023: 13.6%), driven by higher aftermarket profit in Combat and Transport. Submarines growth was also strong in the period. Power Systems reported an operating margin of 10.3% (H1 2023: 7.0%), driven by our pricing actions, particularly in Power Generation where we are capturing growing demand for data centres with improved margins. Across all divisions, our cost efficiency actions have helped to mitigate the impact of inflation.
• Strong cash generation: Free cash flow was £1.2bn (H1 2023: £0.4bn), driven by strong operating profit and continued LTSA balance growth. Civil net LTSA balance growth net of risk and revenue sharing arrangements (RRSAs) of £544m (H1 2023: £609m) in the period was supported by higher large engine flying hours (EFH) and an improved normalised EFH rate, with LTSA invoiced flying hour receipts of £2.9bn (H1 2023: £2.3bn). The improvement in free cash flow versus the prior period was driven by higher underlying operating profit and reduced working capital outflows of £228m (H1 2023: £465m), with a reduction of inventory days of 12 versus H1 2023.
• Building resilience: Total underlying cash costs as a proportion of underlying gross margin (TCC/GM) improved to 0.49x (H1 2023: 0.64x). Net debt reduced to £0.8bn (2023 FY: £2.0bn). We also reduced our gross debt position by repaying a €550 million bond from free cash flow and cancelled our last remaining £1bn UKEF-supported undrawn loan facility, both enabled by our more resilient and growing cash delivery. We now have drawn debt of £3.6bn, of which $1.0bn matures in 2025, and £1.6bn of lease liabilities. Together with cash and cash equivalents of £4.3bn, we have a robust liquidity position of £6.8bn at 30 June 2024 (2023 FY: £7.2bn). We are significantly improving cash flow across all core divisions, creating a more robust and less volatile Group free cash flow delivery.
• Shareholder distributions to be reinstated in respect of the full year 2024 results: As we shared at our capital markets day in November 2023, we are committed to reinstating regular shareholder distributions. We are making strong progress strengthening the balance sheet and building resilience. As such, we are reinstating shareholder distributions in respect of the full year 2024 results, starting at a 30% pay-out ratio of underlying profit after tax to be paid in 2025. We expect over the mid-term regular shareholder distributions to be based on a 30-40% payout ratio of underlying profit after tax.

Transformation programme and strategic initiatives

The success of our transformation programme and strategic initiatives is evident in our financial performance in the first half of 2024. We have made good progress, and there is still more to do. Our strategic framework is founded on four pillars:

• Portfolio choices & partnerships: In Civil Aerospace, deliveries of the Pearl 700 are ramping up for the Gulfstream G700 business jet that entered into service in April 2024. We delivered 83 Pearl engines in the first half of the year and our commercial optimisation actions mean that business aviation engine deliveries are now mostly profitable. We have also invested to grow our capacity in Derby and Dahlewitz, which will allow us to deliver c.40% additional new engines per year from 2025 compared to 2023, with increased capacity to support rising aftermarket volumes. Last year, we identified areas for divestment, from which we expect to generate £1.0bn-£1.5bn gross proceeds by 2028. As part of this, we completed the disposals of our Direct Air Capture assets in the period and, on 31 July, the off-highway engines business in the lower power range in Power Systems.

• Advantaged businesses & strategic initiatives: In Civil Aerospace, the Trent XWB-97 was our best-selling engine with 108 new orders placed in the first half of the year. Our £1.0bn investment programme to improve the time on wing of our modern engines is progressing well. Flight testing is about to commence for the Trent 1000 TEN HPT blade. This part will more than double the time on wing of the Trent 1000 TEN engine and is already in service on c.50% of the Trent 7000 fleet. We completed the design of further improvements for the Trent 1000 and 7000 that will deliver an incremental 25-30% time on wing benefit by the end of 2025. We have also tested improvements for the Trent XWB-84 that will further improve the fuel burn efficiency of this best-in-class engine. We continue to drive for improved commercial terms and lower costs across our widebody and business aviation contracts. This resulted in total contractual margin improvements of £431m (net contractual margin improvements were £223m including a charge of £208m largely associated with supply chain challenges). In Defence, we were selected to partner with prime contractor SNC to provide engines for the US Air Force Survivable Airborne Operations Center (SAOC) programme. In Power Systems, we are capturing demand in the fast-growing market for backup power for Data Centres with a more competitive business model and improved margins as a result of our value-based pricing approach.

• Efficiency & simplification: In total, we expect our Efficiency & Simplification programme to deliver more than £250m of cumulative savings by the end of 2024, on track to achieve our target of £400-500m of savings in the mid-term. Within this, we are also on track to deliver c.£200m per annum of organisational design benefits by the end of 2025. Our new organisational design came into effect on 1 June 2024, which creates a leaner, more focused organisation with fewer layers. In addition, we continue to focus on driving procurement synergies across the Group. By the end of 2024, we expect to deliver c.£0.5bn of cumulative gross third-party cost savings against our mid-term target of £1.0bn, to partly offset inflationary pressures. Supporting this is the roll-out of zero-based budgeting. We successfully completed pilots in Civil Aerospace which demonstrated savings of 10-15% in third party costs in the selected areas. The approach is now being rolled out across the Group.

• Lower carbon & digitally enabled businesses: In Power Systems, we are developing a highly efficient hydrogen reciprocating engine which is partly funded by the German government. In the Power Generation segment, we won major Battery Energy Storage Systems (BESS) contracts, including a contract with Latvia to install one of the largest BESS in the EU. Rolls-Royce SMR is one of two companies shortlisted by Vattenfall, the Swedish power company, to deploy a fleet of small modular reactors in the country. We continue to digitally enable our businesses. In Civil Aerospace, we have introduced machine learning and advanced imaging technologies to inspect turbine blades resulting in a faster, more consistent process that reduces the cost of shop visits and extends the time on wing of critical engine components.

These strategic initiatives and our transformation programme are expanding the earnings and cash potential of the business.

Outlook and 2024 Guidance

Following a strong first half delivery across all divisions, we are raising our full year 2024 guidance. This reflects the continued execution of our strategic initiatives, notably commercial optimisation and cost efficiencies, and is despite the impact of prolonged supply chain challenges.

Our updated free cash flow guidance for full year 2024 includes a £150-200m cash impact related to the supply chain, where parts availability remains constrained. We anticipate a continued impact to free cash flow for a further 18-24 months as supply chain challenges persist. We are actively managing these challenges and seek to mitigate the costs.

Our 2024 free cash flow guidance is based on civil net LTSA creditor growth at the low end of the mid-term range (£0.8bn - £1.2bn), compared to £1.1bn in 2023. In Civil Aerospace, we continue to expect 2024 large EFHs will grow to 100-110% of 2019’s level, 500-550 total original equipment (OE) deliveries and 1,300-1,400 total shop visits.

Strong progress in the early years of our plan demonstrates a front-end loaded delivery of performance improvements. Our 2023 performance and 2024 guidance on operating profit and free cash flow means that by the end of 2024 we expect to deliver more than 75% of the profit and more than 65% of the free cash flow improvement set out in our mid-term targets. As a reminder, our mid-term targets are underlying operating profit of £2.5-2.8bn, an operating margin of 13-15%, free cash flow of £2.8-3.1bn and return on capital of 16-18%. These targets are based upon our expectations for a 2027 timeframe.

Results meeting and conference

Our results presentation will be held at UBS, 5 Broadgate, London EC2M 2QS and webcast live at 10:30 (BST) today. Downloadable materials will also be available on the Investor Relations section of the Rolls-Royce website: https://www.rolls-royce.com/investors/results-and-events.aspx

To register for the webcast, including Q&A participation, please visit the following link: Rolls-Royce 2024 Half Year Results - webinar.net

Please use this same link to access the webcast replay which will be made available shortly after the event concludes. Photographs and broadcast-standard video are available at www.rolls-royce.com

Enquiries:

This results announcement contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and will not be updated. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments. This report is intended to provide information to shareholders, is not designed to be relied upon by any other party, or for any other purpose and Rolls-Royce Holdings plc and its directors accept no liability to any other person other than under English law.